(9) The asset and liability composition of First National Bank is as follow. Ass

Question

(9) The asset and liability composition of First National Bank is as follow. Assets Rate-sensitive $40 million Fixed-rate iabilities 50 million $60 million $50 million Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to by of the total original asset value. A) decline; 5 percent B) decline; 10 percent C) decline; 15 percent D) increase; 20 percent

Explanation / Answer

9) A. Decline, 5 percent

The 5 percent point increase in interest rate will cause the net worth of first national to decrease by 5 percentage of the total original asset value.

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